Investing companies to have only two tiers of subsidiaries: Proposal

NEW DELHI: The corporate affairs ministry has proposed that investment companies be barred from having more than two tiers of subsidiaries to ensure transparency in flow of funds and transactions, a move that is sure to impact infrastructure companies the most.

The proposal, being circulated by the ministry for comments, is part of the draft cabinet note on the Companies Bill 2009 that aims to tighten regulations in an overhaul of the decades old Companies Act.

"Investing companies will be allowed to have only two layers, while there is no restriction in case of other companies," a government official privy to the draft said.

Experts say the recommendation, if accepted, will affect companies, particularly infrastructure firms, that operate across multiple sectors and usually have an investment company at the top, undermining their ability to raise funds. Under the Twelfth Plan, the infrastructure sector is projected at need over $1 trillion in funds.

For other companies, the government would give itself powers to impose limits on the number of subsidiary layers they can have in a sector. The Companies Bill 2009, which will revamp the Companies Act 1961, was proposed after outsourcer Satyam Computer, now Mahindra Satyam, was hit by what became India's biggest corporate fraud.

The Bill is likely to be introduced in the monsoon session of Parliament, another government official said.

Multi-sectoral companies are usually structured in three layers - a group holding company, a sectoral holding company, and a special purpose vehicle below, said Manish Agarwal, executive director at PWC.

"This layering allows investors to come at any level," Agarwal said. Multi-layered companies and their transactions have come become a matter of concern for regulators and investigating agencies trying to establish money trail. The 2G-spectrum controversy has shown how ingenious corporate structuring can help hide identity of promoters in companies.

In January 2009, Satyam had shocked investors when its chairman said the company's profits had been overstated and assets falsified, highlighting the possibility of fraud through inter-company transfers.

The Parliamentary Standing Committee on Finance, which examined the Bill, wanted stringent provisions to monitor dealing among group companies and subsidiaries.

The original bill had not proposed a cap on the numbers and subsidiary layers that a company could have, subject to disclosures regarding their relationship and transactions or dealings between them.

"It is the committee's considered view that the mechanism of inter-corporate loans/investments and resultant transfer of funds to subsidiaries etc. should remain only an instrument of corporate growth, rather than a method for diversion of funds from a healthy enterprise," the Yashwant Sinha-headed panel said.

"Exemption given to loan/investment made in a private company or in a wholly-owned subsidiary company should be denied particularly in the context of Satyam and other recent cases of corporate frauds engineered through off-balance sheet and on-balance sheet investment transactions with inter-connected companies," the committee suggested.

The ministry suggested that no subsidiary should be allowed to set up another subsidiary, limiting the subsidiaries to just one tier. But industry opposed the idea of limit on step-down subsidiaries, saying no country has imposed such restrictions that could undermine the ability of large groups to structure their businesses.

Industry body CII said it would be a 'major impediment towards overseas acquisitions by Indian companies'.